Apple and the Rise of the Subscription Economy

Apple (s aapl) this week introduced App Store subscriptions, and though people disagree on the fairness of the company’s 30 percent take of all revenue resulting from subscription sales, the feature is here to stay. Might its introduction signal a subtle shift towards a new paradigm for paying for mobile content and apps?

At least one person thinks so. Tien Tzuo, Zuora founder and CEO, and former CMO at Salesforce, suggested to me that by introducing in-app subscriptions to the App Store, Apple is joining a general trend toward a subscription-based economy. A subscription economy basically means that instead of a single lump sum payment, you pay a smaller, repeating fee for continued access to goods or services.

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Examples of subscription-based economies can be found in just about every industry. Software-as-a-service (SaaS) is a prime example in the digital world, including accounting services like Freshbooks or project management tools like Basecamp. Dropbox provides subscription-based cloud-storage, as does Apple’s own MobileMe, and media companies like Rhapsody and Netflix are trying to move subscription-based music and video access into the mainstream. You can even subscribe to cars, via rental-sharing companies like Autoshare and Zipcar.

The benefits of paying by subscription are guaranteed continued support through the life of a product, and freedom from quickly outdated software or hardware in a rapidly shifting marketplace. If I buy Photoshop CS5, for example, that’s the version I’m stuck with until I cough up the money to replace it with a new one. If I become a Freshbooks subscriber, I always have access to the most recent version, and I don’t have to worry about the company dropping support for my product until it shuts off the lights for good.

The current App Store economy, while it may appear robust and healthy, actually has some serious problems. For many developers, a continued revenue flow depends on ever-expanding growth, since their apps are priced low and designed as one-time purchases, and customers have come to expect lengthy, free update tails for said apps. If they aren’t selling to new customers, there’s no income to cover the costs of ongoing support and iteration. Tzuo sums up the problems inherent in such a model quite nicely:

The relationship between people and businesses, and the products and services they use, is no longer a one-time event. In fact, why should get developers just get paid 99 cents, versus $5/year to continue to reinvest in their app?

Adopting a subscription model would give devs a bit of breathing room, and provide a truly sustainable model for apps. You could do much better with niche apps, selling to a small, targeted audience, and still have an income stream once you’ve reached market saturation.

While much of the early focus around in-app subscriptions has been around the publishing industry, Apple clearly wants developers in other areas to consider implementing the system. It sent out an email to developer account holders just yesterday announcing the new subscription features, using language clearly aimed at a general audience. And why not? If developers can entice iOS users to embrace recurring payments, Apple wins since it stands to receive more in app revenue.

Consumers also stand to gain, since a subscription model would help developers focus more on delivering a user experience that only gets better with time, instead of quickly becoming stale. They can reap the reward of investing in a service over the long term instead of buying a throwaway app for $0.99 that will get deleted after one day of use, or when something shinier and faster comes along.

A subscription-based app economy could also be hugely useful if Apple genuinely intends to create a cloud-based iPhone, as recent rumors suggest. Kevin pointed out one way Apple could keep onboard storage requirements down for such a device: selling apps as subscription services, with limited on-device lifespans. It’s probably more likely that Apple would use subscriptions to encourage developers to keep in-app rich media content stored off the device, accessible on demand via the cloud depending on a user’s membership level.

Of course, in addition to its many potential benefits, there are barriers and downsides to an App Store subscription economy, too. The first, and biggest hurdle, is developer criticism that Apple is asking for too much with its 30 percent share of all revenue. I think we’ll find, though, that if devs were content to hand over that much of their one-time sales, they’ll probably agree to do it with recurring revenue, too, so long the model catches on with consumers.

The second is that App Store customers are used to one-time payments, an abundance of free apps, and even free feature updates and app enhancements throughout the life of a product. Convincing them that paying repeatedly for a product or service is actually preferable won’t be easy, especially if that product or service is locked to a specific device (or set of devices). Apple will have to foster partnerships with some of the App Store’s most popular developers to convince users to come along for the ride, and developers will have to get creative with what they can offer in exchange for subscription payments to make such commitments irresistibly attractive.

In the end, the barriers blocking the wide adoption of a subscription-based App Store economy are significant, but they aren’t insurmountable. Freemium, a similar concept, is already a huge success in the App Store, and subscription-purchasing models have demonstrated their value in many other areas. All that remains now is for a few brave App Store pioneers to demonstrate that same value exists in App Store subscriptions, too.

Why does subscription automatically include updates? But overall I agree- subscription offers a more sustainable model. But what if someone likes the product so much that they want to own it? Maybe like life membership?

If you are like me, then you will value both the reality and the concept of ownership. I own my car, I am said to own my house (but in reality the bank also own a good portion). Apple want users (from now on to be known as consumers), to put aside their want to own, and be prepared instead, to go along with the notion of renting. I can still drive and live in a house, even if I rent them but I do not get the same feeling when I do. This is a frequently used trick that marketers have used since time immemorial. Apple of course meanwhile has amassed 50 odd billion dollars in cash reserves (99c at a time). I feel just a little bit sceptical… sorry.

the argument re developers needing subscript[on services is a valid one and one that I would accept. they need a flow of money to maintain and improve the app. But I see no justification for Apple skimming 30% off the top. that is far too much for the minimal investment Apple has in any individual App.

If Apple were selling their software thru, say, Amazon and Amazon took 30% off the top, Apple would scream blue murder and all the fan boys supporting Apple in this controversy would be blasting Amazon.

Certainly most of my phone Apps are ones that don’t need constant upgrading and I wouldn’t pay a subscription for. Same for programs on my desktop and laptop. In every case I can think of, I’d rather make the choice myself and would not want a situation where subscription was the only path to purchase of software.

Maybe, apple is trying to gradually change the user behaviour with a restrictive (and simple for both apple and the user) subscription model into the ecosystem. A) By requiring app devs to have the same price, both in-app and outside, for a subscription it simplifies the price decision for the buyer B) Cuts out spammy, spurious subscriptions from the ecosystem, bringing in trust to this whole concept, increasing value long term.

While I can see that certain media companies cannot give up 30% on their margins, many of the complaints are outright dis-ingenous. Would last.fm play fair, or be sympathetic to other players to partake in their ecosystem? of course no.

There are some major problems with Apple’s new subscription services and virtual goods policies that will ultimately result in their failure or critical opportunities missed.

First, unlike many apps many services and virtual goods have a cost of goods. If that cost of goods is greater than 70% of the price then selling those goods or services on iDevices may be untenable. In some cases (e.g. agency model ebooks) the seller has no option to raise prices in order to make up for Apple’s mandated margin.

This means Apple is reserving the entire market for virtual goods and services with less than 30% margin for themselves. In the content business that’s a huge part of the market.

Second, is the problem with subscription services that have APIs. Apple’s new rules require that any app that accesses a subscription service must offer that service through In-App-Purchase. A major problem comes up if that service does not belong to the app vendor.

For example, Dropbox, Flickr, Evernote, Soundcloud and many other CMS-like services have premium subscription services. All these subscription services have APIs that 3rd-parties are generally allowed to use often without any major restrictions. This has led to many unofficial helper apps for these services and apps that access these services for utility purposes. e.g. a photo image processing app that allows you to upload your finished photos to Flickr.

Under Apple’s new rules if I create an app that allows users to access these services I would be required to provide an option in my app to allow users to purchase the subscriptions at the same price or lower than the standard web-based price. Since these are not my services, nor do I control the prices of other’s services this would clearly be impossible. I would need to remove the features or remove my app from sale.

The flip side is that if Apple were to allow 4th party apps to access 3rd party subscription services without following Apple’s requirements then any 3rd party subscription service could game Apple’s requirements by creating a dummy 4th party app.

The net result is that Apple has bitten of a huge section of this subscription economy for their exclusive use and created a Catch 22 preventing the use of utility subscription services in apps. This will either result in either the failure of Apple’s subscription program or will create barriers in the iOS ecosystem that cause critical opportunities to be missed where those barriers don’t exist in competitive ecosystems.

The single largest barrier to subscriptions catching on is the current app store economy and user’s perceptions. People tend to balk at any price above a few dollars on the app store, and I’m not so sure they will feel any better about subscriptions. This is especially true if, as the article suggests, devs use subscription pricing for app updates – consumers expect every app they buy to be regularly updated as part of the deal, and I don’t see them being too happy about having to pay for bug fixes, etc.

It seems that the only way for developers to win this game is to keep the core app price low (or free/ad supported), and keep the subscription price down to something very bite sized, like 99 cents. Devs have experimented with higher cost, well maintained apps, and there’s plenty of anecdotal evidence to suggest that buyer expectations are so high on any app above $3-4 that it’s hardly worth pursuing. If this is true, and devs have to keep prices at dollar-store levels, then Apple’s 30% cut will hurt pretty bad and may keep devs from implementing it.

While this is all speculation on my part, I think the area most likely to grow over the next 1-2 years is cheap throw-away apps. They’re easy to bang out and the devs feel less need to constantly update them, because consumers forget they even purchased the app after a week or so. In the mobile app economy, people will buy a turd for a dollar and smile, but balk at paying $3 for a brick of gold.